Samsung Electronics Co. Ltd. vs Deputy Commissioner Of Income Tax ...
2018 Latest Caselaw 5274 Del

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*    IN THE HIGH COURT OF DELHI AT NEW DELHI
+    ITA 969/2018 & CM Nos.35890-91/2018
                          Date of decision : 4th September, 2018
     SAMSUNG ELECTRONICS CO. LTD.             ..... Appellant
                     Through: Mr. Bhuwan Dhoopar,
                                Advocate

                          versus

      DEPUTY COMMISSIONER OF INCOME TAX (INT. TAX)
                                           ..... Respondent
                  Through: Mr. Ruchir Bhatia, Advocate
      CORAM:
      HON'BLE MR. JUSTICE SANJIV KHANNA
      HON'BLE MR. JUSTICE CHANDER SHEKHAR

SANJIV KHANNA, J. (ORAL):
      The afore-captioned appeal under Section 260A of the Income
Tax Act, 1961 (the Act, for short) has been filed by Samsung
Electronics Co. Ltd., a non-resident company and resident of Republic
of South Korea. The appeal relates to Assessment Year 2007-08 and
impugns a common order dated 22nd March, 2018 passed by the
Income Tax Appellate Tribunal (Tribunal).

2.    The appeal challenges findings of the Tribunal upholding
initiation of proceedings by the Assessing Officer under Section 147
read with Section 148 of the Act.
3.    The appellant-assessee, who has substantially succeeded before
the Tribunal on the questions of permanent establishment in India and
attribution of income has not challenged the said findings.



ITA No.969/2018                                           Page 1 of 11
 4.    For convenience and to examine the contentions raised, we
would reproduce the "reasons to believe" recorded by the Assessing
Officer for the Assessment Year 2007-08. The "reasons to believe"
for the Assessment Year 2007-08 read as under:-
       "A survey in this case was conducted on 24/06/2010.
       During the course of survey it was found that M/s
       Samsung India Electronics Ltd is a subsidiary of
       M/S Samsung Electronics Co. Ltd., South Korea.

       M/s Samsung India Electronics Ltd is in the business
       of manufacturing as well as trading of consumer
       electronics. The items manufactured by the company
       are washing machine, televisions, air-conditioners,
       refrigerators and mobile phones. These items are
       manufactured under the technical assistance of the
       present (sic. parent) company for which the parent
       company receives fees for technical services. The
       parent company M/s Samsung Electronics Co Ltd,
       South Korea has not been paid any royalty for use of
       its brand name 'SAMSUNG' by the subsidiary
       company. Thus, income of the Korean company in
       the form of royalty has escaped assessment. As per
       information available on internet, the sales of M/s
       Samsung India Electronics were Rs.8,000 Crores
       during the previous year relevant to A.Y.2007-08.
       The amount of royalty can be taken as Rs.160 Crores
       by taking the figure of royalty @ 2% of sales.

       Further, during post survey proceedings, statements
       of Mr. Jung Soo Shin, President & CEO of the
       Indian company was recorded on 14.07.2010. It
       was observed that he is also head of South West
       Asia operations of the parent company. Thus he is


ITA No.969/2018                                        Page 2 of 11
        representing not only Samsung India but also
       Samsung Korea in his capacity as South West Asia
       head. The countries covered India, Bangladesh, Sri
       Lanka, Nepal, Bhutan and Maldives. He is not paid
       anything extra to perform his duties in the capacity
       of South West Asia Head. In addition to statement
       of Mr. Jung Soo Shin, the statements of the
       following employees of Samsung India Electronics
       Ltd were recorded.

       (i)     B D Park, Director Mobile Biz & IT Biz

       (ii) Sachin Baweja, Company Secretary

       (ii) C S Choi, Vice President, Corporate Marketing

       (iv)    Y H Cho, Vice President, Sales, North Region
       (v)     HK Seo, Vice President, CE Sales &
               Marketing
       (vi)    J H Kyung, Director, CEO
       A close analysis of these statements further reveals
       that:

       (i)There is no evidence in the minutes of the board
       meetings showing any important policy decisions
       being taken by the board members in India.

       (ii) The Indian company has to regularly update the
       reasons for ageing stock to the parent company. The
       parent    company      regularly    overviews    the
       performance of the Indian company.


       (iii) The team at Indian company collects
       information from Indian consumers and sends that
       information to the parent company so as to develop
       Indianised Product e.g. two vegetable boxes in
       refrigerators, sound focused LCD TVs and Semi


ITA No.969/2018                                          Page 3 of 11
        Automatic Washing Machines are some of the
       products which has been Indianised by the parent
       company on the request of the Indian company.

       (iv) Samsung Korea has different Global Business
       Managements (GBMs) to look after the different
       categories of products. Each GBM develops new
       products which are initially marketed from
       Samsung Korea and then later on localized to be
       manufactured in the different global subsidiaries.


       (v)  In deciding which product is to be imported or
       traded a confirmation is required from the parent
       company.

       (vi)  The purchase price of an imported item is
       decided by a reverse calculation in which first a
       tentative sale price is determined there after taking
       into account the dealer margins and the Indian
       company's overhead the purchase price is negotiated
       with the headquarters i.e. Samsung Korea.


       (vii)(vii) Even the sale price of the products
       manufactured in India is decided after discussion
       with the headquarters.

       (viii)From the above it can be seen that the Indian
       company's office is being used as place of
       management for South Asia operations by the
       parent company M/s Samsung Electronics Co. Ltd,
       South Korea therefore the Indian company would
       constitute PE of the foreign parent company under
       Article 5(2)(a) of the DTAA and a part of income
       from sales in South Asian countries such as
       Bangladesh, Nepal, Bhutan and Maldives should be
       attributed to Samsung Electronics, Korea.



ITA No.969/2018                                         Page 4 of 11
        (ix)  Further, it can be inferred from the above that
       the Indian company is acting as a dependent agent of
       the foreign company in terms of Article 5(5) of the
       DTAA, and the transactions between the two are not
       at arm's length. Hence an adjustment is needed in
       this regard.

       (x)  A perusal of records shows that the assessee
       has not filed its return of income in India for AY
       2007-08.

       (xi) In view of the above, I have reasons to believe
       that income chargeable to tax has escaped
       assessment by reason of failure on the part of the
       assessee to disclose fully & truly all material facts
       necessary for its assessment. The short levy of tax
       exceeds Rs.1,00,000/-. As such the case is covered
       by provision of clause (c) of Explanation 2 of
       section 147 of the IT Act, 1961."


5.    Appellant accepts that the "reasons to believe" correctly record
that survey was conducted in the premises of the Indian subsidiary of
the appellant company in June, 2010. The appellant also accepts that
the Indian subsidiary had manufactured consumer products like
washing machines, refrigerators, air-conditioners, televisions, mobile
phones etc. under technical assistance of the appellant and on which
fee for technical services was payable. Use of the brand name
"samsung" by the Indian subsidiary in trading and sales on which
royalty was payable to the appellant is not denied. The Indian
subsidiary had substantial turnover of more than Rs.8,000 crores and
royalty payable @ 2% of sales would approximately be Rs.160 crores.
Turnover as recorded is not disputed and challenged. Another aspect

ITA No.969/2018                                          Page 5 of 11
 recorded in the "reasons to believe" had emerged from the statements
of officers of the Indian subsidiary recorded during the survey
operations and inquiries made thereafter. The statements had revealed
that the Indian subsidiary had also covered operations in Bangladesh,
Sri Lanka, Nepal, Bhutan and Maldives for which no extra or
additional payment was made. "Facts

" as then ascertained and known were highlighted in the reasons and grounds to hold that the appellant had permanent establishment in India.

6. It was submitted that the "reasons to believe" had erroneously recorded that the appellant had failed to file their return of income, whereas the returns had been duly filed. At the same time, it is accepted that the returns were filed by the branch office of the appellant under the name of "Samsung Electronics Co. Ltd.- India Software Operations". The returns had included income earned by the branch office from the software operations, as is accepted in paragraph 2.2 in the grounds of appeal. Income earned by the appellant from the Indian subsidiary by way of fee for technical services and royalty was not disclosed and included in these returns. Thus, the returns were in a different name with prefix "India Software Operations" and were in respect of taxable income earned by the branch office in the said operations as a distinct and separate assessee. Pertinently, the appellant-assessee in response to the notices under Section 147/148 of the Act had filed returns of income for the assessment year 2007-2008 including and accounting for fee from technical services and royalty received from the Indian subsidiary. This income though earned and taxable in India, had not been disclosed and accounted for in the

returns filed by the branch office in relation to their operations and earnings. Thus, even if it is assumed that the returns filed by the branch office at Bangalore were returns filed by the appellant, the appellant had disclosed new and additional source of income and also the income earned from the said sources in the returns filed in response to notice under Section 147 read with Section 148 of the Act. This was true for the assessment year 2007-08.

7. Aspect and question of permanent establishment and attribution of income to the permanent establishment were issues examined by the Assessing Officer and adverse findings against the assessee were recorded. No doubt, the said findings have been overturned by the Tribunal, but when we examine the question of initiation of re- assessment proceedings under Section 147/148 of the Act, in the present case, we would hold that the appellant has accepted that the "original returns" filed by "them" were incorrect for they had failed to disclose income earned by way of royalty and fee for technical service. This is material and relevant.

8. It is in this context and in terms of the above finding, we would observe that the judgment of the Delhi High Court in Ranbaxy Laboratories Ltd. Vs. Commissioner of Income Tax (2011) 336 ITR 136 would not be applicable as the appellant themselves, pursuant to notice for re-assessment, had declared additional income and accepted their failure to disclose earned income by way of royalty and fee for technical services.

9. The contention that "Tax at Source" had been deducted on royalty and fee for technical services would not matter, as the returns

filed were wrong and required a correction and modification. Failure to disclose fully and truly all material facts, without debate is correct and established. Deduction of tax at source would not matter, as "the return of income" by "the branch office" was not filed in terms of the provisions of the Act to include income of the appellant and, therefore, the Revenue did not have any opportunity to examine and consider the taxable income of the appellant. Deduction of tax at source and failure to disclose taxable income are different and distinct aspects. Escapement and short levy of tax has to be objectively and reasonably estimated by the Assessing Officer at the stage of recording of reasons. This was done and objectively ascertained as is clear from the "reasons to believe" recorded which refer to the turnover and sales of the Indian subsidiary. In Assistant Commissioner of Income Tax v. Rajesh Jhaveri stock Brockers Private Limited (2007) 291 ITR 500 (SC), it was observed that at the stage of issue of notice/recording of reasons the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Conclusive proof and finding on escapement is neither mandated nor required.

10. The Tribunal while rejecting the contention of the appellant- assessee on the question of re-opening had observed:-

"13. Now we shall proceed to deal with the objection of the assessee to the reopening proceedings. First of all, from the reasons recorded, we understand that this is not a matter of reopening proposed solely basing on the statements of the expatriate employees. Apart from the statements, the non disclosure of receipt of

royalty as disclosed by the tax returns of the branch indicated that the royalty received from SIEL was not disclosed. Ld. AO considered the explanation of the assessee and observed in letter dated 18.11.2011 (page No 45 of the Paper book) that the manufacturing Royalty/FTS received by the assessee from the Indian subsidiary as reflected in the tax returns filed by the SIEL was not reported by the assessee, and it is only in the returns filed in response to the notices issued u/s 148 of the Act, such an income was reported. Assessee admitted the fact that they did not declare this income in the original return of income. This fact is borne by the Assessment order dated 18.10.2012 vide paragraph No.7.1 to 7.3, wherein Ld.AO recorded that, to the notice issued u/s 148 of the Act, the assessee replied that the royalty/FTS received from SIEL was omitted by the assessee due to inadvertence to be declared in the original tax return u/s 139(1) of the Act.

14. Following are the details relating to the income as per original return of income, income as per return filed under section 148, furnished by the assessee

Income as per Income as per Amount of "Assessment original return return filed addition Assessed of income (in under section made by AO Year INR) 148 (in INR) (in INR) income (in INR) AY 2004-05 NIL 183,792,647 6,639,512 190,432,159

86,592 was offered to tax AY 2005-06 under "Other 180,897,736 9,894,848 190,792,584 Income"

MAT paid on Book Profits AY 2006-07 (13,10,35,049) 229,261,833 10,722,431 239,984,264 u/s 115JB

NIL (operations AY 2007-08 ceased to exist) 354,257,732 44,789,046 399,046,778

AY 2008-09 NIL (operations 564,889,589 57,863,051 622,752,640 ceased to exist) No return filed AY 2009-10 (Branch was 727,560,470 80,918,894 808,479,364 closed)

AY 2011-12 1,480,742,857 N.A. 84,758,114 1,565,500,971

AY 2012-13 1,976,164,087 N.A. 111,836,425 2,088,000,512

AY 2014-15 6,210,353,870 N.A. 167,753,195 6,378,107,065

15. A perusal of the figures in the statement furnished in respect of the income as reported in the original return of income and the return furnished u/s 148 of the Act leaves no doubt that there is huge difference and in this context it cannot be said that the notice u/s 148 of the Act is not supported by any valid reason or reasons proposing to re-open the assessment for the assessment years between 2004-05 and 2009-10. It is only after re-opening the matter and verification of the re-conciliation of royalty and FTS income as declared in the return u/s 147 of the Act with the TDS details of SIEL, the AO recorded that the Royalty/FTS income as offered to tax in such returns was acceptable. It cannot be said that there is no escapement of income from computation in the original returns of income filed by the assessee for the Assessment Years 2004-05 to 2009-10. It is only because the SIEL affected TDS on such Royalty, FTS income, whose benefit was availed

by the assessee in the revised returns that no further tax liability was incurred though income escaping assessment got taxed in fresh proceedings.

16. We, therefore, find that this aspect of non- reporting of the receipt of income on account of royalty is a valid ground for the Ld. AO to propose the reopening of the assessment, and it cannot be said that there was no escapement of income merely because tax was deducted at source on such income.

17. When it is open under Explanation 3 to section 147 of the Act for the Ld. AO to reassess the income on any issue which newly comes to his notice subsequent to the issuance of notice under section 148 of the Act, it cannot be said that mere wrong mentioning of the provision of law relating to the other issues in the reasons recorded would vitiate the proceedings. We, therefore, reject the contention of the assessee that the reopening proceedings are bad under law.

11. For reasons recorded above, we agree. Accordingly, we do not find any merit in the present appeal and the same is dismissed. We clarify that dismissal of the present appeal would not in any way reflect on the appeal, if any, which may have been preferred by the Revenue for the same years.

SANJIV KHANNA, J

CHANDER SHEKHAR, J SEPTEMBER 04, 2018 tp